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Vermont is in the process of updating its captive insurance regime, with a bill currently being considered by the legislature that will make a number of tweaks designed to make it easier to do business and increase transparency. David Provost and Ian Davis talked about the bill with Captive International.

Every year, Vermont introduces a new captive insurance bill to its legislature, in an effort designed to ensure the state’s regulatory regime remains finely attuned to the needs of its captives community.

The proposals for 2020 have already passed the Senate and are now working their way through the House. They are expected to be passed into law imminently, and serve as another demonstration of Vermont’s commitment to its captive insurance industry.

“There is no risk of our ever running out of ideas for things we can change to improve the captive insurance regime in Vermont.” David Provost, Vermont Department of Financial Regulation

Among the proposals being considered this year is one that would simplify disclosure requirements for agency captives in Vermont, striking what the industry hopes will be a better balance between transparency and flexibility.

Current rules require agencies to make specific disclosures around transactions to policyholders, but this means any changes to the arrangements have to be reflected in the company’s filings—a significant expense. The new rules would allow agencies to report that they are entering a risk-sharing agreement with a captive without having to make changes to their regulatory filings.

Another proposal will increase flexibility around how dormant captives are treated. In the past, the captive had to keep $25,000 on hand when it entered dormancy. The new proposal introduces an exception where the captive has never been capitalised.

Cell rights

Other changes relate to the rights of cell companies, which are being elevated to give them rights equivalent to regular captive insurance companies. Specifically, this will allow segregated accounts to be created within cells, making these structures considerably more flexible, says David Provost, deputy commissioner of the captive insurance division of the Vermont Department of Financial Regulation.

“Some captives may be looking for a simple legal structure, and having segregated accounts within another cell might be the simplest option, legally, in some cases,” says Provost.

“For example, it means the captive needs to conduct only one board meeting, but can operate multiple distinct transactions.”

He adds: “Every captive is used very differently so it is important to make the structures as flexible as possible.”

The change also creates an investment option specifically for cell captives, where previously there was one investment statute requirement that applied to group captives and cell companies alike.

“Under the old law the investment statute was built specifically for commercial insurance companies, not captives. People can still use the old investment statute if they want to, but now they will have a choice to provide us with an investment plan for our review and approval,” says Provost.

The new rules will reduce the capitalisation requirement for sponsored cell companies, from $250,000 to $100,000.

“The idea is that the focus should be on the capital in the cells, not in the core. Capital in the core is idle, the important thing is that the cells themselves are adequately capitalised,” Provost explains.

Meeting standards

Vermont is also making a ministerial correction to the law to meet NAIC accreditation standards. The standards require that risk retention group examination reports be made public. That has been Vermont’s practice for many years, but it was not included in statute.

Ian Davis, director of financial services in Vermont’s Department of Economic Development, says the process of annually updating Vermont’s captive insurance regime is unique to the state, again marking it out as the number one captive domicile in the US.

“While many other states have sought to replicate Vermont’s success by enacting captives-enabling legislation, they have not been able to replicate the close working relationships that have been built over the last 40 years between our state’s policymakers, regulators and the captives industry,” he notes.

The process typically begins in the Fall, when the Vermont Captive Insurance Association’s president brings forward a collection of ideas and proposals gathered from among the trade association’s members, each of which is intended to maximise the state’s appeal as a domicile for captives.

“Each proposal is vetted and challenged to demonstrate how and why it is needed. It is a very thorough process,” says Davis.

“Captive insurance is an important positive contributor to our state’s economy and has become part of the commercial fabric of Vermont. Policymakers, regardless of party affiliation, have a vested interest in ensuring that our leading regulatory framework continues to attract new captives and supports existing captive business in the state.”

“This year we are taking it easy on the legislature,” adds Provost. “It is a relatively simple bill, probably smaller than average in terms of the scope of the changes it envisages.”

The bill includes a few changes requested by the industry, and a few recommended by the regulator, says Provost. “Some years we have added whole new concepts, like when we introduced agency captives or affiliated reinsurance captives. There is nothing so big among this year’s proposals.”

In 2019 Vermont responded to the passage of the Tax Cuts and Jobs Act of 2017, which penalised US companies that used offshore reinsurers in places such as Bermuda. Vermont recognised that this created an opportunity for more reinsurance to be done onshore, and drafted legislation that essentially replicated Bermuda’s reinsurance regime in Vermont. Its second reinsurance company has now been set up in the state.

“We have been doing this for 30 years but there is no risk of our ever running out of ideas for things we can change to improve the captive insurance regime in Vermont,” Provost says.

“Our regulatory framework is what sets Vermont apart. We want to be at the forefront of the industry, and achieving that requires a collaborative process,” Davis concludes.